Terzi to the Rescue

I criticised this former Minister for Foreign Affairs in Italy for comments which, in my opinion, were foolish. He became irritated and is now trying to deny it in bite-sized chunks on Twitter (@GiulioTerzi).

In a nutshell, I question his wisdom in suggesting replacing unemployment benefit with unemployment loans. Read the exact, original quote below from his own website:

Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression”. Minister Giulio Terzi thus explained the anti-crisis role of microcredit and microfinance, as he spoke at the second edition of the “Microfinance and European Union policies Forum” organized by the National Microcredit Agency.

[So, a fairly standard defence of microfinance and its (as yet unproved) miraculous properties. But here’s the second paragraph, I’ve put Terzi’s offending quotes in bold.]

“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

Terzi’s mistakes arise mainly in this second paragraph, which is what he is now trying to deny. First, who are the people this newfound microfinance is aimed at? He clearly states it is the unemployed, amongst others.

Second mistake: he confidently states that microfinance “expands business opportunities” – where is the evidence for this? If this were the case, why have so few studies of microfinance found it has any impact on poverty reduction? He suggests microfinance will get the unemployed to participate in society once again. Lovely, this is what everyone wants to hear, particularly from a vote-seeking politician (before he quit).

So, I think it is fair to conclude, on the basis of logic alone, that Terzi is suggesting here that microfinance can help to get unemployed people back to work. So, now look at his final statement: “[microfinance] can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”

Now, this is likely the bit Terzi regrets most. Microfinance has an additional advantage beyond those listed (getting the vulnerable and entrepreneurial back into society) – it can reduce public spending, particularly that which rises in times of recession. Are there more entrepreneurs in times of recession, or more immigrants? There are certainly more unemployed people, and these drain public spending via their reliance upon the mother of social buffers – unemployment benefit. What other social buffer could be reduced by getting unemployed people back to work, albeit via microfinance, besides unemployment benefit?

In order to reduce the cost of social buffers, microfinance to unemployed people cannot be in addition to unemployment benefit, but instead of. Give money to the unemployed – sure, but make it a loan instead of a donation. This is where I most vehemently disagree with Terzi.

The beneficiary, as stated in this final statement, is the government, not the poor. That the poor benefit from microfinance is a de facto truth taken for granted by Terzi. But the government itself can benefit via reduced public spending. Less need to have social buffers. Less benefits. Less need to raise tax. Less need to borrow on the capital markets. More money for the government to spend on other things – Bunga Bunga parties perhaps?

That microfinance in Europe has a pretty poor track record is discussed in a separate blog. In a nutshell, it has been an unprecedented disaster managed by a handful of mostly ineffective MFIs barely capable of completing a survey, is grossly inefficient, suffers eye-watering default rates, has led to minimal job creation, is aimed mostly at people on welfare, much of it is used for consumption rather than any productive use, and offered to people who are not even necessarily excluded from the mainstream banking sector.

However, unemployment benefit is not a trivial expense to the beleaguered Italian government:

Terzi became Minister for Foreign Affairs in November 2011 (unemployment was 8.5%) and quit in March 2013 (by which point it had risen to 11.5%) following severe criticism for his handling of the shooting of two (presumably vulnerable) Indian fishermen at the hands of Italian soldiers. This latter point is worth exploring a little for an obscure similarity with Terzi’s current predicament, and to get a feel for whom we’re dealing with here:

The Enrica Lexie Incident occurred on 15 February 2012 when Italian soldiers belonging to a Vessel Protection Detachment (VPD) team deployed on a privately-owned oil tanker MT Enrica Lexie opened fire on a tuna fishing boat and killed two Indian fishermen…. The Italian Defence Ministry’s initial attempt to portray the incident as a successful anti-piracy operation and the continual refusals by the Italian Government to publicly acknowledge that the two Indian fishermen were shot by the Italian Navy VPD team on the Enrica Lexie, caused public outrage in India and extinguished any hope of a rapid and discrete diplomatic settlement with India…. Provocative press statements released to the Italian media and incessant tweeting on Twitter by the Italian Foreign Minister Giulio Terzi stoked controversies and became a major impediment to finding a quick solution…. Italian Foreign Minister Giulio Terzi faced severe criticism in the Italian media for his ineffective diplomacy…. Terzi announced that he was opposed to the return of the marines to New Delhi, contradicting his earlier statements which affirmed the decision to return of the marines to India was taken collectively by the Italian government…. Mario Monti also revealed that former Italian foreign minister Giulio Terzi repeatedly hampered efforts to settle the dispute with India in a quiet manner by perpetuating controversies through hawkish statements posted onTwitter.

This incident cost Terzi his job, but it appears his fondness of using Twitter, not entirely appropriately, was partly responsible. Read the whole Wikipedia account for more details, but to put it mildly, he doesn’t come across favourably. And now he’s back on Twitter.

So, I reiterate my opening stance. Terzi is wrong in this regard. He speaks without the slightest shred of evidence to support his claims, whether this be with regard to Indian fisherman being shot, or unemployed Italians being offered loans. He has minimal knowledge of microfinance, but is an avid supporter. In fact, in this regard, he is fairly typical of most microfinance supporters. He is attempting to appease everyone by helping the vulnerable while reducing the cost to the government of helping the vulnerable. I am personally relieved he no longer has ministerial duties, I hope the Italians learn from his mistakes, and let’s hope that he avoids microfinance henceforth.

Microfinance is a potentially useful tool to a sub-set of poor and vulnerable people, if used wisely. It rarely is used wisely, and it certainly should not be considered a cost-saving alternative to welfare payments.

So, Terzi – you are denying saying these things, in bite-sized chunks on Twitter. I publicly challenge you. Let’s speak, on record, and we will publish the entire conversation on this blog. Your performance over the killing of innocent fishermen is public record, let’s now get your views of microfinance into the public domain.